What are the Pros & Cons of 529 plans? (Script)

Question

What are the Pros & Cons of 529 plans? Watch video

Answer

A 529 plan offers many advantages compared to mutual funds, bank accounts, and most other types of investments that might be used to save for college. Its primary benefit has to do with income taxes on account earnings. A 529 account is a tax-free investment provided it is eventually used to pay for qualified higher education expenses. This means all of your earnings go towards college and not to Uncle Sam. In addition, with 529 plans you usually get some state tax benefits, advantageous treatment when applying for financial aid, and professional management of your investments with stringent oversight by the states. It is also a very flexible tool with low minimum contributions and high maximum contributions that can be redirected to other members of the family if the original beneficiary does not need all the money. And of great importance to many parents and grandparents, it is an investment that always stays under your control and not accessible to the beneficiary unless you say so, no matter what the beneficiary's age. The primary downside to a 529 plan is that you risk income tax and a 10% penalty on the account earnings if you take out 529 money for a purpose other than college. Another consideration is that 529 plans do charge an extra layer of fees for the administration of the plan, but most states have brought their 529 plan fees down to very low levels.

Learn more about the benefits of a 529 plan.